China capital curbs reflect buyer’s remorse over market reforms Setback to PBoC’s ‘Trojan horse’ financial and capital account liberalisation strategy

Under the earlier system, the PBoC had been free to set the reference rate wherever it wanted. When market pressures are driving the renminbi downwards, China’s central bank can now stem its fall only by selling dollars from its foreign exchange reserves.

Such interventions have helped drive China’s forex stockpile from almost $4tn in early 2014 to $3.12tn at the end of October and also raised concern about another outflow — this year’s unprecedented surge in overseas M&A activity by Chinese companies. Non-financial outbound investments by China Inc reached almost $150bn over the first 10 months of this year, after a $121bn outflow in all of 2015.

This has given ammunition to critics of another of the PBoC’s main reform initiatives of recent years — a more open capital account.

“The PBoC has been very keen to open up the capital account and downplayed the risk that poses for the financial system,” said Louis Kuijs, Asia economist for Oxford Economics. “It’s the State Council, finance ministry and everyone else who are less keen in making capital account progress.”

Yu Yongding, a former central bank adviser, argues that outflows are dangerous and that the PBoC’s use of forex reserves to counteract them has been a waste of money. Even with steady intervention to support the renminbi, the currency has depreciated more than 5 per cent against the dollar this year and last week fell through the 6.9 level.

“Better late than never,” Mr Yu told the Financial Times this week. “The policy of increasing capital controls and stemming outflows is completely correct.”

The PBoC is not, however, completely comfortable with this year’s M&A outflows. According to people close to the central bank, Mr Zhou has been a strong advocate of the need to reduce China Inc’s high debt levels and much of this year’s surge in overseas direct investment has been driven by highly leveraged companies venturing into areas far beyond their expertise.


Verteidigungsfonds soll Europa unabhängiger machen

Die Europäische Kommission will die Mitgliedstaaten der EU zu höheren Verteidigungsausgaben bewegen, um Europa damit unabhängiger von den USA zu machen. “Wenn Europa sich nicht um seine eigene Sicherheit kümmert, wird es niemand sonst tun”, sagte Kommissionspräsident Jean-Claude Juncker in Brüssel. Die Kommission schlägt in einem Aktionsplan die Einrichtung eines Verteidigungsfonds vor, in den die EU-Mitgliedsländer einzahlen und darüber enger bei der Beschaffung zusammenarbeiten.

Jährlich sollten fünf Milliarden Euro bereitgestellt werden, etwa zum Bau von Drohnen oder um neue Generationen von Kampfhubschraubern anzuschaffen. Bisher liefen rund 80 Prozent der Rüstungsbeschaffung rein national ab, was zu “kostspieliger Dopplung militärischer Kapazitäten” in der EU führe, so die Kommission. Sie taxiert die Mehrkosten aufgrund mangelnder Zusammenarbeit zwischen den EU-Staaten auf 25 bis 100 Milliarden Euro pro Jahr.

Italy’s Crisis Turns into a Multi-Headed Hydra

As with all major crises, Italy’s current predicament is a multi-headed hydra. It’s a banking crisis, an economic crisis, a debt crisis, and a political crisis all rolled into one, and all coming to a head at the same time.

Italy’s economy has been in reverse ever since it joined the euro 17 years ago. Since 2007, its GDP has shrunk by a staggering 10%. In the meantime its public debt has continued to grow, reaching 135% of GDP today, the highest level of any Eurozone country with the exception of Greece. And now the yield on Italy’s 10-year bond is on the rise, hitting 2.09% on Friday in a NIRP world, its highest point in over 13 months.

Investors are worried about two things: the very real prospect of a government defeat in the upcoming referendum on constitutional reforms (a subject I covered last week) and Italy’s blossoming banking crisis.

Italy’s Crisis Turns into a Multi-Headed Hydra

China’s Ball of Money Is Rolling Back to Commodities

In China, money flow is tightly controlled and capital markets are relatively underdeveloped, meaning the economy works like squeezing a balloon.

You press it in one place, and it bulges in another. Policy-maker moves to cool one expansion only serve to inflate another.

Now that “gyration of bubbles,” according to Société Générale SA’s chief China economist Wei Yao, has been heating up the commodities market again.

Earlier this month, thermal and coking coal futures hit a record high since their debut in 2013 while zinc soared to the highest since 2011. Steel rebar, nickel, tin, iron ore and rubber futures also climbed to multi-year highs.